Stop Blaming the Insurers

It's not them. It's us. Exposing three myths about the costs of private health insurance.

Here's what's not in dispute: The United States spends 16 percent of its national income on health care, more than any other country in the world. In return, we get lower life expectancy than most other Western countries, uneven care, and enormous anxiety about how to pay for it.

Who's to blame? Not the hospitals and doctors, or the health care consumers (that is, us) who insist on expensive and questionable elective procedures. It's big health insurers—isn't it? Easy enough: Our interactions with them are impersonal, their political clout is substantial, and their names and logos look and sound like they came out of focus-group hell.

Alas, the slice of our enormous health care costs that can reasonably be laid at the insurers' doorstep is much, much smaller than most people believe. The debate about health care tends to be informed by three notions about health insurance:

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The profits of private insurers are so big that cutting them out would meaningfully lower costs.

Private insurance clearly costs more than a government-run system such as Medicare.

Mergers that have created a small number of huge and powerful insurers increase health care costs.

This is the most pervasive and most crowd-pleasing of the health care myths. The profits of the big health insurance companies are central to the rhetoric of the health care debate, figuring heavily in the Democratic primary campaign. Barack Obama's platform includes a promise to force insurers to spend enough on care "instead of keeping exorbitant amounts for profits and administration." Michael Moore, the director of Sicko, has hammered the point repeatedly, thundering about how insurers maximize profits by "providing as little care as possible."

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The problem here is that between them the five biggest health insurers—UnitedHealthCare, Wellpoint, Aetna, Humana, and Cigna—which cover 105 million members, last year had profits between them of $11.8 billion. This is not a small number; these are very profitable companies. But total U.S. health care costs last year were in the area of $2.3 trillion.

So, with a membership that included a little more than half of the Americans covered by private insurance, these five insurers' profits came to 0.5 percent of total health care costs. (One interesting point of comparison: In 2006, the income earned by the 50 biggest nonprofit hospitals alone came out at $4 billion.)

Critics also argue that insurance companies pass along excessive administrative costs to their customers. Wellpoint, for instance, spends 18 percent of the premiums it takes in on sales and administrative costs. That represents a real concern but merely raises the next question: Can a government-run program that cuts out insurers do it for less?

Myth No. 2: Evidence from Medicare shows that a government program can provide the same services for less than the insurers.

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A common argument raised in support of a national "single payer" health insurance system is the experience of Medicare Advantage, a program that gives seniors the option of replacing traditional Medicare with private insurers' HMO or "preferred provider" network plans. Nine million of the 44 million people Medicare covers have signed up. A well-publicized report by the Commonwealth Fund calculated the cost of these plans at 12 percent more than traditional Medicare. This number was picked up by the New York Times' Paul Krugman as an illustration of the excessive costs of private insurance. More recently, the Center on Budget and Policy Priorities, a liberal think tank, has estimated the greater cost of Medicare Advantage as more than $1,000 a year extra per beneficiary.

These accurate numbers miss the fact that Medicare Advantage's design virtually guarantees that it will be more expensive than traditional Medicare. The reason for this, however, is not the excessive cost of having private insurers administer the plans. It's the cost of inducements that government has offered seniors to join them.

The original idea behind Medicare Advantage was to reduce costs by pushing seniors into HMOs that would be able to rein in health care costs. The big incentive for seniors to join the plans is supplemental coverage similar to what's offered by Medigap plans.

The government pays insurers more than the costs of Medicare, but most of that money is (and must be, by mandate) returned to members in the form of lower deductibles and co-payments. Yes, Medicare Advantage HMO programs do cost the government more than standard Medicare.

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But guess what? Take out the cuts in costs that patients pay themselves, and, in fact, the plans cost 3 percent less. So in a typical state like Minnesota, where standard Medicare runs the government $666 a month for each beneficiary, the government may indeed pay about $725, but the insurer will get only $650 of that, while the member gets cuts in out-of-pocket costs of $75 a month, or about $900 a year.

This isn't the end of the story. It turns out that seniors, like just about everyone else, prefer the ordinary Medicare model—which let them see any participating doctor—to an HMO. So Medicare Advantage added "fee for service" plans, private plans that offer flexibility—and still include the incentives. (Does this undercut the original point of the program? You bet.)

These plans do cost 9 percent more, even after taking into account the lower deductibles and co-payments. But be careful about jumping on this number. Here's why: When you eliminate co-payments and lower deductibles, people go to the doctor a lot more often. According to the Government Accountability Office, seniors with Medigap coverage may cost the government as much as 25 percent more than those without. When you take that into account, it actually might be surprising that Medicare Advantage isn't still more expensive.

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None of this means that the Medicare Advantage program is cost-efficient. The bottom line, though, is that its costs come not from insurance company inefficiency or profiteering, but from the extra benefits shoehorned into it.

Myth No. 3: The concentration of power in a few large insurers raises health care costs.

Politicians and doctors' groups blame the mergers of many smaller insurance companies into a few behemoths for rapidly increasing premiums. Big insurance mergers have been vigorously opposed by the politicians in California who fought against the huge Anthem-Wellpoint merger, and in New York. In Nevada, Gov. Jim Gibbons has said a merger of two big insurers would "take money out of the pockets of consumers and physicians." The American Medical Association has put what it calls "anti-trust reform" among the top items on its agenda.

We should be wary of mergers driving up the premiums that insurers can charge. But that fear is not the real reason why the American Medical Association has vociferously lobbied to put the brakes on mergers. That reason is the other, bigger effect of consolidation: It lowers the reimbursement rates that insurers give to doctors and hospitals. The hospital you go to and the doctor you see face to face might be more sympathetic than the health insurers, but they are a much larger part of the health care cost equation.

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How big is this effect? One measure: Reimbursement rates from major insurers in Pennsylvania for some procedures have fallen to just 85 percent of the already low Medicare rates. And what makes it even worse for doctors (and, yes, potentially better for health care costs) is that insurers' contracts often have a "most favored rates" clause. If one huge insurance company can squeeze hospitals for better prices, then others are entitled to the same deal.

Whether, in fact, doctors and hospitals are unfairly pressed by giant insurance companies is a debate that may be worth having. And maybe the insurance companies' power should be reduced. But that would lead to higher, not lower, costs.

Diagnosis

Patient, heal thyself. It's not insurers that push expensive drugs, long-shot end-of-life treatments, and redundant procedures. It's customers who ask for them. And mainly doctors and hospitals who profit. How to deal with those issues is a question that will affect the health care bottom line more than whether it's the government or private companies that provide insurance. Too bad it's one we have hardly even started to answer.

Mark Gimein is a New York-based writer. He is not affiliated with any insurance company.